Bull Trap vs Bear Trap

Whereas a bull trap is a temporary revival of the price in a downward trend, a bear trap is a correction in an upward trend. Both these corrections are false signals which can catch bullish and bearish investors respectively off-guard. They are called traps, as investors are fooled that a trend is reversing. Let’s dive into the difference between a bull trap vs a bear trap.

Investors and traders who monitor a stock or coin, often rely on resistance and support levels. These are important price levels for some technical reason. For example, if a price level has acted as support on many occasions, a drop below that level can signal that the price won’t recover above this level. But this can be the bear trap: a trader sells or shorts, only to watch empty handed how the price recovers and shoots up above the support level. 

What Is a Bull Trap?

Bull trap vs bear trap are mirror images in terms of their patterns: in the case of a bull trap the price seems to break above a resistance level. The trader buys, only to be trapped with a loss as the price breaks down again.

Example of a Bull Trap

In the above example, the four-hour chart of EUR/USD shows that the price broke above the previous resistance within a strong bullish trend. This would have been a signal to traders to go long EUR. It couldn’t stick above it, though. After a few retests of the support level (previous resistance level), the price broke down (in a bearish engulfing pattern, see below) and a new downtrend began.

What Is a Bear Trap?

Bear traps often occur in strongly up-trending coins (or stock). A bearish event or strong downward price action makes some investors believe that the uptrend will reverse. Bears sell, or put on short positions at precisely the wrong time, followed by a price reversal back upward.

Example of a Bear Trap

The stock or coin then continues its march upwards, forcing many of the short sellers to cover. The resulting sharp price increase is also called a short squeeze. Why? As the bears scramble to limit their losses by buying back the coin or stock, it creates a feedback loop that makes the price rise even more sharply.

A short squeeze resulting from a bear trap can be more fierce than its mirror image, the long liquidation of the bull trap. That is because the loss you risk if you are leveraged long is limited: the stock can’t go further down than zero. Whereas in the case of being trapped in a failed short, the upside of a coin’s price – and your potential loss – has no limit. This makes shorters extra panicky.

(There is by the way a difference between the crypto and the stock markets in the way the process of liquidation works. The so-called perpetual swaps of crypto trading platforms like ByBit are structured in such a way that the loss can’t exceed the amount of money traders put in, also in the case of shorts.)

Why Do Bull and Bear Traps Happen?

First of all, it’s ‘nature‘. The price action is in a certain pattern until some new information pops up (a tweet by Elon Musk, a war that breaks out) and makes the market reverse. Behind the scenes of the two-dimensional space that we call price action, multiple types of dynamics are playing out that all push and pull in their own way. As some forces wane, others take over and shift the shape of the pattern a price graph is in.

Second, the price can be manipulated behind-the-scenes by actors that have an interest in trapping other investors. These are the games that can be played by whales. One of the least savoury examples would be a fraudulent exchange buying and pumping their own token with customer’s funds, to artificially keep it above a certain price level.

But the traps can also be set in legal ways. Big market players simply have more power to move the price. They know every trader is looking at the same charts, with similar knowledge about breakouts, support, resistance, etcetera. Having a lot of ammo, potentially with leverage, institutional parties can ‘play’ the market by forcing it in directions that the trading textbooks don’t predict. For example, they short a stock right when most traders expect a bullish reversal. Then the institutions buy the stock after the price dump. In altcoins markets this is of course easier to accomplish than in the case of let’s say Apple stock.

Bull Trap vs Bear Trap: How to Spot Them

• Look at volume. If the volume on a breakout or breakdown is high, this is an indication that the market agrees on the price direction. If the trading volumes are low, there is a higher risk of a bull or bear trap.
• Be mindful of doji candles and an engulfing pattern. A bearish engulfing pattern, for example, happens when the red candle following the price rise of the bull trap is bigger than the previous green one. For a bear trap, the pattern would of course be reversed, with an engulfing green candle. Also, so-called dragonfly doji candles can indicate that bear trap is unfolding (and the reverse gravestone doji for a bull trap). A doji is a candle with a long wick, where the opening and closing prices are almost the same. It signals a moment of indecision from the market, which can become a tipping point in either direction.
• Watch multiple resistance/support tests. If in an uptrend the price tests the new support level (previously resistance level) just once, that’s healthy. If price action tests the resistance several times, it might indicate a bull trap is unfolding. The reverse of course in case of a potential bear trap.
• Watch for divergence between RSI or MACD and price. If these momentum indicators move in a different direction from the price, there is a higher risk of a reversal.

How to Avoid Getting Trapped

Don’t fight the trend too much. If the bulls are in control – if there is, for example, a lot of momentum behind the uptrend – hesitate to go short. The trend is your friend, especially if volume remains high. Going against the trend on a low-volume correction is risky.

On the other hand, if you’re someone who likes to time the market, you can use the bear trap setup and bull trap setup as a way to time your entry and respectively your exit.

For more tips on managing your portfolio, check out our Crypto Beginner Guide section: How to Make a Good Crypto Portfolio?